Incidents:

Zhenan Technology (300767.SZ) recently released its three-quarter report: the first three quarters of 2022 achieved revenue of about 653 million yuan, an increase of 42.00% over the previous year; net profit attributable to shareholders of listed companies was 78.7911 million yuan, an increase of 0.46% over the previous year; net profit of 79,6647 million yuan after deduction of the mother was 79,6647 million yuan, 11.19% over the same period last year.

Commentary:

The Q3 performance growth rate achieved high year-on-year growth, and impairment caused a certain drag. Revenue for the third quarter was 222 million yuan, a year-on-year growth rate of 73.45%, and the net profit of the mother was 24.15 million yuan, a year-on-year growth rate of 85.53%, after deducting non-net profit of 22.84 million yuan, a year-on-year growth rate of 105.09%. The third quarter reported credit impairment losses of 24.92 million yuan, a sharp increase of 184.53% from the beginning of the period. The main reason was the increase in accounts receivable and bad debt preparations. The external environment is complicated this year. Funding for local infrastructure is relatively tight. The downstream of the earthquake is relatively tight. Most of them are pre-funded construction. There may be an increase in upstream and downstream accounts receivable accounts in the industrial chain, but the downstream projects are mostly livelihood projects, and there is a lot of cooperation between central enterprises of the country and central enterprises. Repayments may be delayed but will not be absent. It is expected that they will gradually recover in the fourth quarter or next year.

Profitability was relatively stable in the third quarter, gross margin remained flat year over year, and net interest rate improved year over year. The gross profit margin for the first three quarters was 42.61%, a slight increase compared to 42.48% in the interim report, and a slight decline from 45.57% in the same period last year. The gross profit margin for a single quarter in the third quarter was 42.88%, which is relatively the same as in the third quarter of last year. The Q3 net profit margin was 10.86%, which was flat and slightly lower than the previous month. Compared to the same period last year, the overall rate declined relatively, but the increase in impairment led to a small improvement in net interest rates.

Currently, comprehensive design capabilities are still a scarce resource. The company recently released an equity incentive plan, which will help stabilize core key personnel and further help the competitiveness of leaders. The incentive plan plans to grant 1.6848 million restricted shares to 101 people, accounting for about 0.68% of the company's total share capital of 2,477.908 million shares. The main motivators include company directors, senior management, core cadres, and others with special contributions. The target for this equity incentive performance assessment is that net profit deducted from non-return to the mother in 2022-2024 will not be less than 30%, 95%, or 192.5% for 2021, and the corresponding net profit deducted from 2022-2024 will be 30%, 50%, 50%.

The acceleration in the commencement of new municipal housing construction is expected to be compounded by industry expansion logic to promote overall progress. There are many livelihood housing projects such as middle schools and hospitals in demand downstream to dampen earthquakes. It is a type of construction project clearly supported by China. It is municipal housing construction funded locally. Currently, China uses a lot of seismic isolation for installation and delivery at the beginning of the project. According to research by the Centennial Construction Network, the progress of municipal housing construction accelerated at the end of September, the progress of municipal housing construction accelerated at the end of September, demand for newly started projects picked up, and the acceleration in municipal housing construction commencement is expected to drive seismic damping materials at the beginning of construction. With the subsequent improvement of the epidemic, the impact on the daily operation activities of construction projects is also expected to gradually weaken.

Profit forecasting and investment ratings: Since the “Regulations on the Administration of Seismic Resistance in Construction Projects” were implemented in September 2021, many provincial and municipal housing and construction departments and provincial design institutes have implemented and promoted the contents of the “Regulations on the Management of Seismic Resistance of Construction Projects”. As a leading enterprise in the industry, the company has continuously expanded its staff and production and advanced layout. It has been working hard for a long time, and the volume is imminent. At the same time, in the long run, there is a trend of continuous improvement in China's construction safety reserves. As one of the important safety assessment indicators, the importance of building seismic performance continues to increase. Seismic damping technology is currently the technology with the best seismic resistance in buildings. The long-term trend of increasing penetration rate has basically been determined, and a diversified demand situation is already evident. Based on the actual situation in the three-quarter report, we consider the impairment or increase brought about by accounts receivable this year. Therefore, the profit forecast for the whole year was lowered. It is expected that the company will achieve net profit of $155, 493, and 842 million in 2022-2024. The corresponding EPS is 0.63, 1.99, and 3.40 yuan respectively, and the corresponding PE corresponding to the current stock price is 73.03/23.01/13.48X respectively.

Risk factors: Infrastructure investment has been drastically reduced, raw materials have risen sharply, market competition has intensified, implementation of the “Regulations on the Administration of Seismic Resistance in Construction Projects” has fallen short of expectations, and the epidemic continues to recur.